The Keynesian Stimmy Palooza—Now Comes The Morning After

Mainstream Keynesians don’t get it. There has never been any magic to fiscal and monetary “stimulus”—just the pulling forward in time of future economic activity, purchased at the expense of higher long-term debt loads and the resulting permanent drag on real growth.

But in the Donald Trump enabled Covid spending palooza of 2020-2021, $6 trillion of Keynesian stimulus was injected into the economy as if it was its own fiscal version of Operation Warp Speed. It was a reckless but grand experiment of literally staggering magnitude.

Indeed, the eruption of transfer payments during that 12 month period (April 2020-March 2021) had never been remotely imagined by standard Keynesian economists, or even madmen muttering in the night. And that was compounded by the fact that virtually every dime of it was monetized by the Fed in an act of financial fraud that was without precedent.

For want of doubt, here is the annualized rate of government transfer payments (Federal, state and local combined). Prior to the Covid panic the typical rate of annualized gain was between $90 billion and $150 billion during the 25 quarters ending in Q1 2020.

But then Washington jumped the shark with concentrated volleys of spending that still have to be seen to be believed. During the first wave of bailouts and free stuff in Q2 2020, the annualized gain was $1.77 trillion or about 14 times the previous norm; and then all caution was thrown to the winds with the Donald’s last barrage in Q1 2021, which got layered by the Biden bailout in March.

The combined annualized rate of gain during Q1 2021, therefore, was a staggering $4.8 trillion. That’s 38 times the prior norm, and actually amounted to 22% of GDP.

Still, riddle us this. Do any of the talking heads pimping for the allegedly “strong” economy during Biden’s first year or the Wall Street shills urging to buy the dip because of “strong recovery” have a clue as to the massive distortion that has been caused by these thunderous bursts of stimulus?

They do not. And that’s because in Keynesian World even the most grotesque sins against sound economics are forgiven and forgotten if current GDP numbers can be spun in a positive manner.

Annualized Rate Of Government Transfer Payment Increase, 2014-2021

Alas, have these knuckleheads given a thought to the “morning after”, and to the sequencing of the massive contraction of fiscal and monetary stimulus that is now underway?

For starters we can begin with the alleged huge build-up of “savings” by the household sector, which, of course, was nothing of the kind. The massive increase in household cash balances—currency, bank deposits and money market funds—shown below was not “saved” by households, but was “borrowed” by Uncle Sam who seconded it to the public via the transfer payment eruptions shown above.

As displayed in the chart, the typical gain in household cash balances on a Y/Y basis (annualized rate) was about $400 billion prior to the Covid spend-a-thons, but that soared to $2.4 to $3.0 trillion per annum during the 12 months intercepting in Q2 2020.

By the latest available data (Q3 2021), therefore, household cash balances would have stood at $14.23 trillion based on the 4.93% annualized gain recorded over Q4 2011 through Q1 2019. The actual figure, however, was $17.23 trillion, implying a $3.00 trillion gain above prior trend growth in household cash balances.

Of course, these artificially bloated cash balances are supposed to be the spending support which will keep the boom going until its becomes organically self-fueling. But there is a problem with that comfortable delusion: Namely, that households also continued to run up their debts during the last three years, even as transfer payment rates are just beginning to plunge back toward their pre-Covid trends.

Y/Y Change In Household Cash Balances, 2011-2021

In the graph below we pair household cash balances (red bars) with total household debts (blue bars). As it happened, between Q1 2019 and Q3 2021, the gross gain in cash balances was $4.6 trillion, but that was offset by a $1.9 trillion gain in total debts. So the net cash cushion theoretically available to offset the currently unfolding decline in transfer payments is just $2.7 trillion.

Household Debts Versus Cash Balances, 2019-2021

Based on the chart for total government transfer payments depicted below, we estimate that once all the stimmies expire, total transfer payments would normalize at about $3.38 trillion on an annualized basis. That compares to the astounding $8.05 trillion annualized rate posted during Q1 2021 and the level of $3.90 trillion posted in Q4 2021.

Stated differently, total household incomes are slated to drop by another $500 billion per annum as the Covid stimmies expire, and Washington falls back into a GOP dominated stalemate that will block any effort to revive or extend the insane level of spending which prevailed during Q2 2020 and Q4 2021.

Needless to say, this means that the alleged giant household “savings” cushion will not last very long when viewed net of the massive household debts that have continued to build. That is to say, the morning after wont be any Keynesian picnic.

Total Government Transfer Payments At Annualize Rate, 2018-2021

Even the above, however, assumes that wage and salary gains hold up at recent rates. But we very much doubt it owing to the fact that rising inflation is rapidly cutting into the value of wage and salary incomes.

As shown below, hiding beneath the boom in transfer payment-funded household spending in 2021 was the lowest rate of inflation-adjusted wage and salary gains since 2013.

That’s right. Adjusted for the CPI, last year’s Y/Y gain of $49 billion was only 44% of the $111 billion gain posted in 2021 and just 17% of the $284 billion gain posted in way back in 2014.

In short, what is coming down the pike is not a Keynesian boom, but payback time from the collapse of the stimmies and soaring inflation like never before.

Inflation-Adjusted Gain In Household Wage And Salary Incomes, 2014-2021